Southwest Sees $1 Billion Atlanta Revenue Gain on AirTran Merger

Southwest Sees $1 Billion Atlanta Revenue Gain
A worker directs a Southwest Airlines Co. plane at Denver International Airport on March 1, 2011. Photographer: Matthew Staver/Bloomberg

Southwest Airlines Co. expects to add as much as $1 billion in new annual revenue in Atlanta, home to the world’s busiest airport, as it revamps the hub acquired in the purchase of AirTran Holdings Inc.

Service will shift to focus on larger cities and more direct flights, because those customers are more profitable than passengers who make connections, Chief Executive Officer Gary Kelly said yesterday in an interview. Daily departures will fall about 13 percent to 175 as some smaller markets are cut, he said.

Making Atlanta mirror Southwest’s system will boost sales there by $750 million to $1 billion, Kelly said. It’s the first time Dallas-based Southwest has shared such detail, and Kelly said the projections are already part of the airline’s $400 million target for so-called merger synergies.

“We’ll unwind the hub and operate a typical Southwest point-to-point schedule,” Kelly, 56, said in Atlanta. “You’d rather have two nonstop passengers than one connecting passenger. AirTran yields a certain revenue per mile flown, and Southwest gets a premium to that.”

For 2011’s first quarter, the last full period before the AirTran deal was finished in May, Southwest reaped 11.99 cents for each passenger flown a mile, compared with 10.43 cents for AirTran.

Southwest, the largest discount carrier, didn’t serve Hartsfield-Jackson Atlanta International Airport before buying Orlando, Florida-based AirTran. The airlines must operate separately until U.S. regulators grant them a joint certificate, probably early next year.

Baggage Fees

AirTran policies such as business-class cabins and fees to check bags and change tickets boosted its total revenue from each so-called passenger mile to 11.56 cents in the first quarter, while Southwest’s revenue on a comparable basis was 12.66 cents. Kelly said Southwest will still gain revenue because it can adjust fares with greater precision based on seat availability and demand.

“We’re going to attract more business travelers because we don’t have the fees, and I believe it will be a net plus,” Kelly said in the interview at Atlanta’s Stone Mountain Park where Southwest was hosting a party for thousands of employees.

About 35 percent to 40 percent of Southwest passengers fly on business, compared with about 20 percent for AirTran, he said. About 75 percent of Southwest passengers fly nonstop. AirTran’s mix at Atlanta was 35 percent local and 65 percent connecting travelers.

Passenger Loss

Some loss of passengers who want to fly business class is inevitable, Kelly said. Delta Air Lines Inc., the world’s second-largest carrier, is the market leader in Atlanta with 75 percent of passengers.

“You never capture everything, but that is not a material amount of business” that might be lost by eliminating AirTran’s business class, Kelly said.

Southwest and AirTran aren’t yet able to share codes on flights, which would allow passengers to book on either carrier on the same itinerary, because the technology and training isn’t in place yet. The airlines plan to code share in 2012’s first half, he said.

Transition plans are under way to mesh the carriers’ differing policies on luggage fees, boarding procedures, business class cabins and assigned seats, he said.

High fuel prices are forcing Southwest to be “more tactical” in its approach to smaller AirTran destinations, Kelly said. AirTran dropped four cities, including Asheville, North Carolina, and Newport News, Virginia, because of lack of demand before the Southwest purchase was completed.

Southwest managers are still studying which AirTran cities and flights will be kept, and those plans may change in coming months depending on fuel and the economy, he said. Jet fuel rose 11 percent this year before today.

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